The Real Estate Roundtable Sentiment Index

The Real Estate Roundtable’s Sentiment Index measures the views of leaders in the commercial real estate industry regarding the state of the real estate industry. The index measures the views of senior executives regarding current and anticipated conditions on three topics: overall real estate conditions; access to capital markets; and real estate asset pricing. The complete survey is available on the Real Estate Roundtable web site: www.rer.org.

The following are the topline findings from the second quarter 2013 survey:

  • The Q2 Index remains flat. General sentiment is one of modest optimism, supported by slowly and steadily improving fundamentals and an increased interest in expansion beyond core markets and highly-rated assets.
  • Enthusiasm is still tempered by political and macroeconomic uncertainties, in particular regarding the future interest rate environment.
  • Asset values in core markets continue to rise. Although some class A asset values in primary markets seem to have bounced back from the economic crisis, many industry leaders are concerned that the recovery has been driven primarily by inexpensive capital.
  • Capital is available, with debt and equity seen as readily accessible — yet many respondents express the need for more buying opportunities to balance supply and demand.

U.S. Leveraged Loans: ‘Cov-lite’ Expansion
 

As reported in Standard & Poor’s Ratings Services’ “Structured Finance Research Update,” leveraged loans without covenants or “cov-lite”, account for over one-half of 2013’s issuance year-to-date of leveraged loans. Why is this so potentially problematic? While pre-crisis cov-lite loans as a class did not underperform or perform any worse than loans with covenants, it seems to us that this is just one more sign of a weakening in investment and credit underwriting by investors hungry for yield in today’s low yield world.

Monday’s Numbers

The Trepp survey for the period ending May 24th showed spreads unchanged as lenders contented themselves with a run-up in Treasury yields to increase their income. All-in costs remaining in the sub-four range for top tier assets and in the mid-4.0 percent area for less “pristine” assets and borrowers.

 

Asking Spreads over U.S. Treasury Bonds in Basis Points
(Ten-Year Commercial and Multifamily Mortgage Loans with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

12/31/12

5/24/13

Month Earlier

Office

342

214

210

210

173

181

Retail

326

207

207

192

167

174

Multifamily

318

188

202

182

162

165

Industrial

333

201

205

191

165

171

Average Spread

330

203

205

194

167

173

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.01%

1.70%


The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads for the period ending May 2, 2013 showed spreads for 10-year, fixed rate mortgages secured by Class A property, coming in as much as 15 basis points during the past month with spreads for Class B property narrowing a similar amount. 

10-Year Fixed Rate Commercial Real Estate Mortgages (as of May 2, 2013)

Property

Maximum
 Loan-to-Value

Class A

Class B

Multifamily (Agency)

75% – 80%

T +165

T +180

Multifamily (Non-Agency)

70% – 75%

T +175

T +180

Anchored Retail

70% – 75%

T +170

T +210

Strip Center

65% – 70%

T +190

T +230

Distribution/Warehouse

65% – 70%

T +185

T +215

R&D/Flex/Industrial

65% – 70%

T +185

T +235

Office

65% – 75%

T +175

T +205

Full Service Hotel

55% – 65%

T +235

T +280

Debt service coverage ratio assumed to be greater than 1.35 to 1.

 

Year-to-Date Public Equity Capital Markets

DJIA (1): +115.35%
S&P 500 (2): +14.34%
NASDAQ (3): +14.45%
Russell 2000 (4)15.87%
Morgan Stanley U.S. REIT (5):+7.00%

 (1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index. (4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.

U.S. Treasury Yields

12/31/11

12/31/12

5/31/13

3-Month

0.01%

0.08%

0.04%

6-Month

0.06%

0.12%

0.07%

2 Year

0.24%

0.27%

0.30%

5 Year

0.83%

0.76%

1.05%

7 Year

1.35%

1.25%

1.55%

10 Year

1.88%

1.86%

2.16%

                                                  

Key Rates (in Percentages)

 

Current

1-Year Prior

Federal Funds Rate

0.08

0.17

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

U.S. Unemployment Rate

7.50

8.70

1-Month LIBOR

0.19

0.24

3-Month LIBOR

0.28

0.47